hard · Corporate Credit Analysis fsa

If a borrower is 'PIK-ing' (Paying-in-Kind) its interest, how does this appear in the Unlevered Free Cash Flow (UFCF) versus the Funds from Operations (FFO)?

1. UFCF will decrease because the growing debt balance is treated as a drain on operating working capital reserve.
2. FFO will decrease significantly because the accrued PIK interest must still be subtracted to reflect underlying economic reality.
3. UFCF is unaffected as it excludes interest; FFO is higher than it would be under cash interest because the outflow is non-cash.
4. Both metrics will decrease as the growing PIK interest burden represents a contractual 'leak' embedded directly in the cash flow waterfall.

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